Crowdfunding rules are changing in Europe

The agreement reached by the EU institutions removes the obstacles resulting from different local regulations by introducing a single European passport for crowdfunding platforms in Europe. The new rules will apply to all European crowdfunding providers for projects up to $5.5 million (€5 million).

The recent agreement on European Crowdfunding Service Providers (ECSP) introduces single crowd-lending and crowd-equity regulation covering all 28 EU member states. The agreement reached by the EU institutions on the new regulation for the business crowdfunding service providers will give further impetus to the spread of cross-border crowdfunding. This was made possible through cooperation between the European Commission, the European Parliament, the European Council, the European Crowdfunding Network (ECN) and industry.

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Crowdfunding in Europe, the scenario of recent years

Sergio Zocchi, CEO of “October”, a platform to finance companies online which is active in continental Europe, outlined the scenario of crowdfunding in Europe in recent years.

According to Zocchi, crowdfunding in Europe has had to deal with the absence of a single regulatory framework within the Union and the consequent complexity resulting from the spread of different legislation at the local level. The absence of a real Single Capital Market has been a brake, hindering the access of European SMEs to financial resources from investors from all over the EU. The new regulation “European Crowdfunding Service Providers for Business” removes this barrier by introducing a European passport for platforms that want to operate in more than one EU country without the need to apply for the relevant national authorizations.

Zocchi’s company, “October”, is an alternative to the traditional banking channels. Active since 2015, “October” disbursed over $407 million (€367 million) distributed on 127 projects in November 2019. More than $185 million (€167 million) in interest has already been repaid to lenders in Italy, from inception (i.e. from the launch of the platform in Italy in May 2017), by the end of 2019, it had disbursed over $74 million (€67 million) distributed on 121 projects.

So far, cross-border operations have been more of an exception than a rule. According to Zocchi, making the “October” platform available on several markets (France, Italy, Spain, the Netherlands, and Germany) has required a lot of regulatory efforts, with different interlocutors for each country and different reference standards. One of the main effects of the new regulation for October will be the possibility to open the platform to German retail investors who will be able to lend it to Italian companies as well. On the other hand, our international community of savers will have more investment opportunities, being able to lend money to SMEs based in Germany.

The novelties of the new regulations

This is an important innovation in a sector in which platforms operate mainly at the local level. The new rules will apply to all European crowdfunding service providers (ECSPs), increasing the maximum amount of project funding up to $5.5 million (€5 million). The platforms will also have to provide investors with clear information on costs, project selection criteria and financial risks they may face, including insolvency risks. Finally, the new regulation provides for different levels of investor protection with the definition of new classifications: if sophisticated investors are not restricted to investment activity, non-sophisticated investors will have to undergo a test to assess their knowledge of the risks involved in financing companies, will be adequately informed of the risks and will have to explicitly accept them.

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(Featured image by Michael Longmire via Unsplash)

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First published in EconomyUp, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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